Moral concerns on tradable pollution permits in international environmental agreements

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Summary

We investigate how moral concerns about permit trading affect an
endogenous pollution permit trading equilibrium, where governments choose
non-cooperatively the amount of permits they allocate to domestic
industries. Politicians may feel reluctant to allow permit trading and/or
may prefer that abatement is undertaken domestically because of moral
concerns. This will have an effect on the initial permit allocations, and,
therefore, on global emissions. The impact on global emissions depends on
the precise formulation of the moral concerns, but under reasonable
assumptions, we show that global emissions may increase. Thus, doing what
is perceived as good does not always yield the desired outcome. However,
this can be offset by restrictions on permit trading when governments have
moral concerns about this trade.